5 steps to retirement with $5 million

While $5 million is a significant amount, having that size retirement savings still requires careful handling. Here are a few ways to make sure that this amount covers your wants and needs after you break the 9 to 5 routine. One of the wisest steps you can take to ensure you can do what you want in retirement, is to work with a financial advisor to develop a retirement plan that will guide you through the two or three decades that you will save.

Step one is making a plan. This is something that many retirees, including the wealthy, do not do. According to Northwestern Mutual’s 2020 Planning and Progress Survey, nearly half (40%) of American adults are not clear about their current spending limits now and what their spending limits will be later. They don’t know where to draw the line to put it off until later. As a result, 27% report holding back, while another 22% spend without knowing and hope they still have enough. The study also found that 71% of Americans think their financial plan needs improvement, but only 29% work with a consultant.

Creating a financial plan starts with creating a retirement budget. This can show if your $5,000,000 can cover the lifestyle you plan to enjoy for the next 20 or 30 years. The budget should take into account basic living expenses, including housing, food, utilities, and transportation, as well as healthcare, hobbies, and travel. If you don’t know where to start, review your current spending patterns.

Try tracking your expenses for at least six months, and then ask yourself some key questions like:

  • What you are spending now is probably similar to what you will spend in retirement?

  • Do you have any expenses now that may increase or decrease when you retire? Something that can disappear altogether?

  • Are there categories of expenses that you don’t currently have that you could add to your budget when you retire?

These questions will give you an idea of ​​how much it will cost to maintain your standard of living in retirement and help you determine a realistic drawdown rate. Sometimes experts recommend withdrawing 4% or less of your pension assets each year to ensure you have enough money. Assuming you have $5,000,000 in retirement, you could realistically withdraw $200,000 in your first year of retirement. This amount will gradually decrease each subsequent year, assuming zero portfolio growth.

Consider downsizing

There are several reasons to consider downsizing. This reduces your costs. Mortgage payments or rent are lower. Fixed costs such as insurance, maintenance, repairs and property taxes are less in a smaller residence.

This may reflect a decrease in the need for space to live in retirement. You may have had children who needed a place to play and enough space for all your memories to grow. But as retirees, your children are more likely to own their own homes.

You may even be considering layoffs for the sake of your health and mobility. After all, falling is a serious hazard for people over 60; life in a one-story building promises fewer risks for pensioners than in a multi-story building.

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Move to save

If your estimated retirement budget exceeds your expected retirement income, you may want to consider moving to a more affordable area to cut costs. When evaluating budgetary pension places, consider:

  • Average cost of housing

  • The cost of renting versus buying

  • Average healthcare costs

  • Access to healthcare

  • Crime level

  • Leisure and amenities

  • Location, weather and climate

Compare which states are the most retiree-friendly and fit your pricing goals. For example, the cheapest states to buy a house are concentrated in the middle and southeastern regions of the United States. The top four are West Virginia, Arkansas, Alabama, and Mississippi. However, looking at the states with the lowest taxes, Florida is a strong contender for cities like Tampa, Jacksonville, and Miami due in part to its lack of income tax. None of these lists actually overlap, which shows the various advantages that a state can have. On the one hand, you will have lower taxes, on the other hand, cheaper housing. There are even five states that have eliminated the statewide sales tax: Alaska, Delaware, Montana, New Hampshire and Oregon.

Alternatively, you may consider going abroad. Malaysia, Panama and Slovenia consistently rank among the cheapest places to retire, allowing you to soak up a new culture. But if you’re planning to retire abroad, be sure to do your research. In addition to considering the cost of living, check any legal requirements for residency in your chosen country. Weigh your health care options and explore the potential tax implications of receiving Social Security benefits or withdrawing money from investment accounts from afar.

Make sure your money continues to work for you

Money should never be retired. For example, it is tempting to keep your funds in a standard checking account. This is a separate place to store your money. But instead of just saving money, you can dedicate some of it to investing. One of the easiest ways is a savings account. This is usually a low-risk, low-return option, but you can increase your income with a high-yield savings account instead. Compared to a savings account that offers an interest rate of 0.01% to 2%, high yield savings accounts typically have interest rates of 1% to 2.2%. A higher interest rate will also help you keep up with inflation. Look for one that has low fees.

Alternatively, there are money market accounts, which are a compromise between a checking account and a savings account. They allow you to access and withdraw your money, but still earn a higher interest rate. A high-yielding money market account can bring about 2% per annum.

And these are just two of the savings opportunities you can use to passively save money. Other investment options may be better suited to meet your long-term goals, so consider your level of risk and desired return.

Eliminate credit card debt

Avoid unnecessary debt. Pay off the entire balance owed each month on credit card debt. Interest rates well above 20% are not uncommon. If you are facing high expenses, consider taking out a personal loan. They usually have lower interest rates and premiums than credit cards. By getting rid of credit card debt, you will create new financial opportunities. You can put this money into your retirement savings and help grow your funds.

bottom line

Having $5 million at the end of the working year creates a financial cushion. You can live a comfortable life, have fun on the go, recover from occasional unexpected expenses, and leave something for your loved ones or favorite charities. The main thing is to have a financial plan based on a realistic budget. After that, consider downsizing or moving—or both. Make sure your funds are working hard for you and keep unnecessary and excessive debt under control.

Retirement advice

  • Consider talking to a financial advisor who can help you with your retirement planning. Finding it shouldn’t be hard. SmartAsset’s matching tool puts you in touch with up to three local advisors in just minutes, making finding the help you need the easiest part of your retirement planning. If you’re ready, start right now.

  • Use the Retirement Calculator and Social Security Calculator to help you figure out how to allocate your $5 million or any other amount. If you are experiencing major life changes, run the new numbers with the retirement calculator to get an updated projection.

Photo credit: ©iStock.com/AscentXmedia

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